SodaStream Has Major Problems: Should Investors Be Worried?

Shares of home soda-machine company SodaStream (NASDAQ: SODA  ) are hitting new 52-week lows, with shares down more than 50% over the past year. SodaStream's growth story has hit a snag, with its push into the United States suffering major setbacks, and a big competitor in the form of Keurig Green Mountain's (NASDAQ: GMCR  ) upcoming Keurig Cold home carbonation system promises to shake up the market sometime in 2015. Is this just the beginning of SodaStream's decline, or is this decline an opportunity to load up on shares?

Problems in the U.S.
SodaStream's growth story hinges on strong growth in the United States. The company has been selling home carbonation systems in Europe for decades, and in fact sales outside of the United States are still going strong. In the most recent quarter, sales in Western Europe rose by 17% year over year, while sales in the Asia-Pacific region jumped by 28%. But sales in the Americas plummeted by 28%, a massive decline in what is supposed to be SodaStream's most important market.

Part of the problem was excess inventory left over from a tough holiday season. Sales of the company's starter kits, which include a machine as well as some flavors and carbonators to get started, plummeted by 28%. Sales of consumables did far better, rising 15% year over year, and the company still expects to grow total sales by 15% in 2014 despite basically flat revenue during the first quarter. This suggests that the company expects to work through its inventory issues relatively soon.

Serious competition is coming in 2015
Starting next year, SodaStream will have a major competitor to deal with. Earlier this year Coca-Cola and Keurig Green Mountain announced a partnership to bring a competing home carbonation system to market, replete with products from Coca-Cola's extensive portfolio. While SodaStream has partnered with many beverage companies, the major soda companies have been holdouts.

Only about 1% of households in the United States own a SodaStream machine compared to the double-digit rates that the company has achieved in some European companies. This means that the market is still very much up for grabs, and with both Coca-Cola and Keurig having strong, well-known brands, SodaStream has a lot to worry about.

Still a niche market
Home carbonation systems are still a niche market, and I have serious doubts that that will ever change. The problem is that these machines don't actually solve a problem or eliminate an inconvenience. I'll compare a SodaStream to one of Keurig's K-cup coffee machines to illustrate what I mean.

While Keurig's K-cups were once considered a fad, the machines have proven to be extremely popular, with the company selling 1.8 million brewers in the last quarter alone. Using K-cups to make coffee is more expensive than using a traditional coffee machine, but K-cups eliminate the inconvenience of having to measure out ground coffee, an often messy affair. In other words, K-cups solve a problem for consumers, and although they introduce higher costs, millions have chosen convenience over cost.

Home soda makers don't really solve a problem. While it may seem convenient to be able to make soda at home, tacking on soda to a grocery trip and having the drink available immediately instead of having to make it yourself is a far more convenient proposition. Coupled with the fact that SodaStream doesn't begin to save a consumer money compared to buying soda at the store until they drink hundreds of liters, the device lacks a compelling reason to buy it, at least in the United States. Soda prices are higher in many other countries, which helps explain why adoption rates are higher in those countries. But in the United States, SodaStream offers savings for only the heaviest of soda drinkers.

What does all this mean for investors?
Home soda machines remain a niche device, and the low cost of store-bought soda in the United States compared to other countries is working to keep it that way. SodaStream is doing very well in other countries, but the growth story in the United States doesn't seem nearly as compelling. Competition from Keurig should not be ignored, especially since SodaStream's market penetration is so low, and the strength of Coca-Cola's brand may be all it takes to propel the device past SodaStream in the United States.

SodaStream now trades at a P/E ratio of around 17, and the stock is certainly far less expensive than it was in 2013. But SodaStream has no competitive advantage in the United States. It has no double-digit percentage install base like it has in certain European countries, and that will make it all the easier for Keurig to swoop in and steal market share. I just don't see a compelling reason to invest in SodaStream.

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Read/Post Comments (10) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On July 08, 2014, at 5:36 PM, agzand wrote:

    The article fails to mention that Keurig system relies on a chemical reaction to generate carbonation, that is exactly what consumers do not want, more chemicals in their food. It will be much more expensive that Sodastream (both the machine and the soda). It can't be used to just carbonate water without flavoring (that's how I use my machine, and so do major portion of users in Europe). You can also make soda for alcoholic beverages, or just add some fruit juice. They also have a relatively healthier selection for traditional syrups (e.g. cane sugar or stevia sweetened).

    The author claims Sodastream has no competitive advantage in US. That is far from truth, they have the largest CO2 distribution network imaginable. You can do it walmart/target/costco/bed bath/home depot, pretty much anywhere.

    If anything Keurig marketing budget will work for Sodastream, people will check the Keurig system in the store, then they notice the competing sodastream is cheaper, healthier (less chemicals), more versatile and can be used with no syrup or natural fruit juice. If you actually use the machine you will understand it is not a fad, it really allows you to make healthy drinks and cocktails at home. The problem appears to be marketing, in Europe carbonated water is much more prevalent than US. So Sodastream is a natural choice. In US they need better marketing to grow user base.

  • Report this Comment On July 09, 2014, at 9:46 PM, cowboy2014 wrote:

    Making Soda and coffee are different processes. You make carbonated water then add the syrup to taste. That is the best method. Otherwise you lose home convenience. Therefore once Coca-Cola releases a syrup, Sodastream owners will buy the syrup. If Keurig machine is more expensive, then guaranteed to fail. They might sell to diehard fans but majority of people will be price conscious. Sodastream stock is an absolute steal right now! Even the options.

    As far as this article its absolute BS. Its like saying people won't listen to music if a poppy radio station doesn't play it. The internet and Itunes has given the music industry more efficient distribution and music has benefited. People purchase coke/pepsi etc because they are not given another choice (concentrations, sugar levels, etc). Now people have another choice. Me personally I don't like over-concentrated sodas. I like my sodas lightly flavored. Others might like them more concentrated then sold in retail space. Sodastream is the internet all over again. This time around don't be an idiot and get on the bandwagon early.

  • Report this Comment On July 09, 2014, at 10:51 PM, cowboy2014 wrote:

    To make it more clear. This misguided article predicates Keurigs carbonated soda (without flavor) will be better than Sodastreams soda (without flavor). If the analogy is to coffee then the "syrups" are "cream and sugar". In the coffee space the actually coffee quality matters. The plain carbonated soda quality doesn't matter (just Co2). Therefore the "Cream and Sugar" analysis is moot. No one cares about the cream or sugar in your coffee. IT DOESNT DETERMINE WHAT BEVERAGE SYSTEM YOU PURCHASE. ONLY PRICE WILL DETERMINE MOST SYSTEM SALES!

    If anything Coca-Cola made a huge mistake purchasing a likely-to-fail machine when they should've focused on their "Cream and sugar".

  • Report this Comment On July 10, 2014, at 7:21 AM, tripoley1966 wrote:

    The convenience is not lugging home 2L bottles, 12 packs, etc. One carbonator plus five 500 mL bottles of syrup equals thirty 2L bottles. That's about one grocery bag of SODA products.

  • Report this Comment On July 10, 2014, at 10:45 AM, profitalert wrote:

    agzand, And how do you think SodaStream makes its CO2? It's a chemical process that's been packaged in a bottle that gets used over and over again. That bottle never gets cleaned and only accumulates contamination over the years.

  • Report this Comment On July 10, 2014, at 11:01 AM, profitalert wrote:

    Cowboy, you are wrong. The quality of soda water matters. Why don't you survey water drinkers and also include the subset fizzy water drinkers? You will find that water quality or taste is very important to water drinkers. If you have lousy home water, you will make lousy soda water. Those soda water drinkers are probably the most loyal and consistent sodastream customers. You will notice that CO2 outsells syrups. A consumer is also likely to overbuy syrups, so they have a variety. As a result, syrup sits on their shelf and the crummy ones get thrown out.

  • Report this Comment On July 10, 2014, at 4:48 PM, agzand wrote:

    Quote:

    "agzand, And how do you think SodaStream makes its CO2? It's a chemical process that's been packaged in a bottle that gets used over and over again. That bottle never gets cleaned and only accumulates contamination over the years."

    The chemical reaction is done elsewhere, inside the cylinder is pure CO2, just like any soda fountain. The Keurig system relies on a PG&E patent that traps CO2 inside some chemicals in the capsule. So you consuming these chemicals.

    The bottles do get cleaned, and the system is definitely much cleaner than any soda fountain in any restaurant. The fact that you machine doesn't need cleaning and the syrup doesn't touch the machine is a big plus.

  • Report this Comment On July 11, 2014, at 8:19 AM, C237 wrote:

    There are many assumptions and statements made which are opinion and that I find to be misleading.

    1. "SodaStream's growth story has hit a snag". Analysts are expecting 28%+ growth per year for the next five years. YOY are all double digits in the near term. Has the growth story really hit a snag?

    2. "Starting next year, SodaStream will have a major competitor to deal with". Possibly. Has anyone seen the coke/gmcr machine or tested it? Will there be delays causing release to be in 2016 rather than 2015? Will consumers like it? Or will it be a flop and a huge plus for SODA with all the extra advertisiing?

    3. "The problem is that these machines don't actually solve a problem or eliminate an inconvenience." This is an opinion, and I strongly disagree. I dont have to lug cases of seltzer from the grocery store. I dont have to go buy tonic water or ginger ale when we have a party, I never run out of carbonated water or soda since I can plan ahead on syrup and co2 purchases. It also saves money. see below.

    4. "Using K-cups to make coffee is more expensive than using a traditional coffee machine". Not true if you do the math on the coffee in a pot that is never consumed, the cost of washing more dishes, or assume you go to starbucks instead. It's not just a home coffee machine, many people put it in a travel mug for their commute so starbucks' prices should be compared.

    5. "... SodaStream doesn't begin to save a consumer money". I completely disagree. I don't always use syrup and when I do it's not a lot. And carbonated water with some lemon has replaced other beverages that I previously paid for. So you have to look at the whole picture if you want to do a comparison. I often just add a little juice to my carbonated water too, which results in drinking less juice (and saving money). etc...

    6. "SodaStream offers savings for only the heaviest of soda drinkers." It amazes me that a writer analyzing SODA still thinks that consumers use this machine solely to make soda. See above. I use it for soda (mostly for mixers) about 5% of the time. We make lemonade, carbonated water with lemon, carbonated water with a little juice, tonic water, energy drinks, etc.

    7. "Home soda machines remain a niche device" Aren't tesla's a niche product? DIdn't the ipod start out as a niche product? What is your point here? And regardless of where it is now, doesnt the other part of your article talk about how KO/GMCR are going to make it more popular? You can't have it both ways.

    8. "SodaStream now trades at a P/E ratio of around 17". Why would you concentrate on PE of a growth stock. the PEG is .58 !!! And that makes for a compelling investment, unless you think that every analyst is completely wrong. And if you want to stick to PE, the KO and GMCR PEs are 22 and 34, respectively.

    Things not mentioned in the article:

    1. SODA products are much better nutritionally. NO aspartame, less carbs and calories, and less sodium. Comparisons here: http://www.sodastreamusa.com/TasteNutritionInfo.aspx

    2. There have been rumors of SODA being acquired. This should play into anyone's investment thesis, because it's a potential huge boost to the stock. Even if it doesn't happen you're getting a growth stock at a PE less than the growth rate. That's hard to find.

    Overall, i'm very disappointed by this author's abuse of opinion, conjecture, and high-level analysis without many facts, research, or ability to look at the company from a perspective other than his own pre-determined negativity.

  • Report this Comment On July 11, 2014, at 12:34 PM, profitalert wrote:

    agzand, why don't you explain how the insides of the bottles get cleaned and how often. Not too concerned with the outside of the bottle.

  • Report this Comment On July 11, 2014, at 12:36 PM, profitalert wrote:

    Agzand, pure CO2. Gas companies sell N2, H2, AR, O2 and many other specialty gases. They don't sell pure anything even into the semiconductor industry with very strict requirements.

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